Market Outlook Wednesday June 26th

Welcome to hump day, which given where the market currently sits may just offer traders a curve ball or two.  Since we never know what the outcome of any given trade will be, my mantra of dealing with this uncertainty is to fully embrace it.  If we fully embrace the inherent uncertainty in trading, then sticking to our rules becomes easier.

As discussed in yesterday’s column (here: the May 22nd top in the S&P 500 was just a matter of time given the loud signals that both the commodity and bond markets had flashed since 2012.  Yesterday morning more than a few readers asked me how significant I suspect that the May 22nd top in equities was.  Given the strong signals from other asset classes, as well as the following points, I imagine its entirely possible that the S&P 500 has seen its high for the year, or at the very least until the November – December period.

  1. While the November trend line break that occurred last week looks nasty on the daily chart, the weekly chart shows this even more pronounced.  As a general rule of thumb, the longer the chart time-frame, the more value I adhere to a signal.  At this stage, for the weekly chart to repair itself it would take one heckuva recovery rally.

spx weekly

2.  Looking at the yield of the 10 year US Treasury note, the sheer magnitude of the rally over the past month or so is enough to at least for some time scare the bulls back out to the farmland.  In other words, the blast was loud enough to keep the equity bulls away for the time being, even though from a macro perspective a rising yield environment is bullish equities in the early to mid part of a recovery.  The question of course is whether after a four and a half year bull market we can still classify this as early/mid, or as a recovery at all.  Confused?  You should be, which is exactly why I chose to be a trader rather than an economist.

bond yields

Heading into last week the S&P 500 daily chart was once again quite arrogantly waving a so called bull flag formation, which last Thursday quickly broke to the downside.  As the saying goes, from false moves come fast moves.  The broken bull flag pattern on the daily chart is the first meaningful bullish pattern I saw failing thus far in 2013.

spx bull flag fake out

In the immediate term, with Monday’s bounce off the 1560 area and yesterday’s continuation buying, the S&P 500 has recovered the most overbought readings to some extent.  I for one am looking to nibble at the short side of this market again around the 1590 – 1600 area.


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